Why Corporate Venture Capital Deals Are Small

Price Waterhouse Coopers and National Venture Capital Association recently released the MoneyTree Report on Corporate Venture Capital. Data from the report show that the average independent venture capital investment was $8.3 million last year, while the average corporate venture capitalist deal was only $4.2 million. Moreover, the ratio of the two has ranged from 1.7 to 2.9 for the past decade.

Why is the average corporate venture capital deal much smaller than the average independent venture capital investment?

Both corporate and independent venture capitalists provide cash in return for a minority equity stake in a young, high-potential technology company. However, the two types of venture capitalists make their investments for different reasons. As Ian MacMillan, the Dhirubhai Ambani Professor of Innovation and Entrepreneurship at the University of Pennsylvania, and colleagues explain in a PDF report written for the National Institute of Science and Technology (NIST).

“While the sole objective of independent venture capital is financial return, CVCs generally have a strategic objective as well. That objective may include leveraging external sources of innovation, bringing new ideas and technologies into the company, or taking ‘real options’ on technologies and business models (by investing in a wider array of technologies or business directions than the company can pursue itself).”

Because corporate venture capitalists are making partially strategic investments, while independent venture capitalists are making purely financial ones, corporate venture capitalists can accomplish their goals by putting in less money. The ability to tap knowledge from an investment in a young company is not proportional to the size of the investment, but earning a financial return is. Therefore, corporate venture capitalists tend to make smaller investments than independent venture capitalists.

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